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SAN FRANCISCO - A federal appeals court was to hear arguments on whether U.S.-based Internet service providers are liable for damages in foreign courts for speech originating from the United States.

That First Amendment question was before the San Francisco-based 9th U.S. Circuit Court of Appeals (news - web sites) on Thursday. The case was brought by Internet portal Yahoo Inc. (Nasdaq:YHOO - news), which is challenging a growing multi-million-dollar fine a Paris court levied four years ago for continuing to allow the site's French users to buy and sell Nazi memorabilia.

Yahoo wants the appeals court to declare that the judgment, now at about $15 million and growing by as much as $15,000 per day, cannot be collected in the United States — the only venue where the two French human rights groups who sued Yahoo can claim the judgment.

Yahoo's French subsidiary, yahoo.fr, complies with France's law, but a French judge ordered Yahoo.com of Sunnyvale, Calif., to strip Nazi paraphernalia from the portal's most popular site. Yahoo did not appeal the French order, and instead went to a U.S. District Court in San Jose where the First Amendment battle began.

A San Jose federal judge in 2002 ruled Yahoo, as an American company, was not liable for the judgment. The human rights groups appealed to the 9th Circuit, where a three-judge panel of the San Francisco court overturned the San Jose judge's decision.

The appeals court said the San Jose judge ruled prematurely because the human rights groups had not sought to collect the judgment. France's Union of Jewish Students and the International Anti-Racism and Anti-Semitism League haven't acted on the French judgment, so the appeals court said the San Jose judge unlawfully intervened and decided the case.

Yahoo appealed to the 9th Circuit again, asking it to rehear the case with 11 judges. Without comment, the court agreed last month.

"We need to be able to determine whether or not we have an obligation to comply," Yahoo attorney Mary Wirth said. "Because if we can't get early word from the court about our compliance obligation, we're in a Catch 22 between choosing censorship or letting fines accrue."

Yahoo says its more than two dozen subsidiaries comply with the law in each nation where they are based. Demands that its U.S.-based portal abide by French law violate the First Amendment, and it's technologically impossible to censor its U.S. site for users in France, Wirth said.

Legal experts said if Yahoo can clarify its position in the United States, other U.S-based Internet service providers will also understand their liabilities.

"Who has a right to exercise legal jurisdiction over content that's on the Web?" asked Jeffrey Pryce, an international lawyer in Washington, D.C. "Suppose it was Saudi Arabia, Afghanistan (news - web sites) or Saudi Arabia. It could get kind of frightening."

The human rights groups' attorney, E. Randol Schoenberg, agreed with the 9th Circuit's original ruling that the case was prematurely decided by a San Jose federal judge.

Schoenberg said Yahoo has dramatically limited the Nazi material that can be auctioned on its American site, and that his clients have no intention, at least not yet, of going to a U.S. federal court to collect the ever-growing judgment.

"From Yahoo's perspective, they want to know in advance whether they are going to be subject to this judgment. They want the assurance it's not enforceable in the U.S. because the threat that it could be enforced in the U.S. is chilling their free speech," Schoenberg said.